Unit 12- Other Securities Products

Question 1

Hedge funds are typically organized as what?

Answer 1

A limited partnership with less than 100 investors, where the fund manager also has “skin in the game.”

Question 2

What is a “2 and 20” fee structure for a hedge fund?

Answer 2

The manager gets 2% of AUM, and 20% of profits.

Question 3

Difference between “amortizing” and “non amortizing” CDOs?

Answer 3

Amortizing = backed by debt that has an end date. (Like a mortgage)

Non-amortizing = backed by debt that is open ended (like a credit card)

Question 4

How often does CMOs pay investors?

Answer 4

Monthly

Question 5

The five classes of CMOs?

Answer 5

Principal Only (PO) = Payments to investors come from principal payments only. They are issued at a discount to par, and do not make monthly payments.

Interest Only (IO) = Is a product of the PO. Receives interest payments. Can be used to dredge interest rate risk.

Planned Amortization Class (PACs) = They have a target retirement date, because they get paid first. They are designed to decrease prepayment and extension risk. They can exist, because “support tranches” take the volatility when payments change.

Target Amortization Class (TACs) = Similar to a PAC, but it ONLY transfers prepayment risk to a supporting tranche, not extension risk.

Zero Tranche (Z-Tranche) = Receives no prepayment until all other tranches have been retired. They are the MOST volatile.

Question 6

Denomination of a CMO?

Answer 6

Issued in $1,000 denominations.

Question 7

Where do CMOs trade?

Answer 7

OTC

Question 8

Define: securitization

Answer 8

The act of pooling assets into a single security (like a CMO).

Question 9

What information does the Public Securities Association provide that investors are interested in?

Answer 9

Mortgage payment history date. Used for analyzing CMO potential performance.